Tuesday, June 5, 2012

Germany suggests EU bank oversight

The Wall Street Journal reports that Germany is preparing to endorse the idea of centralizing oversight of the largest banks in the EU in an EU supervisory authority.

According to the article, what is motivating Germany is the concern that the different national bank regulators have pursued regulatory forbearance and nobody can tell what is the true extent of the losses at the banks.

Regular readers know that there is a better solution than creating an EU supervisory authority.  Simply require all EU banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

With ultra transparency, all market participants can see the true extent of the losses.

With ultra transparency, market discipline will force the banks to recognize these losses.  This will restart the EU economy as capital will flow to creditworthy companies and not to zombie companies.

With ultra transparency, market participants can exert discipline on the banks to restrain their risk taking as they retain earnings to rebuild their book capital levels.  This complements the EU taking advantage of the design of a modern banking system with its deposit guarantees and access to central bank funding to end bank bailouts.

The bottom line:  rather than add another layer of regulators and expose the German taxpayer to endless bank bailouts, Germany should endorse centralizing oversight in the market by requiring ultra transparency.
German Chancellor Angela Merkel on Monday suggested that European Union leaders consider putting the largest banks in the 27-nation bloc under direct European supervision, opening the door to more centralized oversight of the region's financial sector.
The German proposal, which echoes a similar call from European Central Bank President Mario Draghi last week, comes as the region's leaders are trying to rebuild confidence in Europe's battered banking sector.
The only way to rebuild confidence is by requiring ultra transparency.  Without ultra transparency, market participants will assume that policymakers and financial regulators have something to hide.  Not a bad assumption considering that they have been hiding the true condition of the banks since the beginning of the financial crisis.
In contrast to Mr. Draghi and the European Commission, however, the German leader stopped short of endorsing more ambitious plans to safeguard the region's financial system by creating a "banking union." Under that idea, which was presented last week by the commission, there would be a Europe-wide depository insurance and other financial backstops.
Your humble blogger happens to back the idea of a Europe-wide depository insurance system.  It should backstop the various national deposit guarantees.
Though Berlin has resisted a banking union, Ms. Merkel's initiative shows Germany is willing to talk about an overhaul and is trying to focus the debate on Europe's biggest banks. 
"We will discuss to what extent we need to put systemically relevant banks under a specific European supervisory authority so that national interests do not play such a large role," Ms. Merkel told reporters ahead of a meeting in Berlin with European Commission President José Manuel Barroso, referring to the June 28-29 summit....
Ultra transparency takes national interests out completely as the market does not care where a bank is when it evaluates it.
Yet it's unclear what, if any impact, these initiatives would have on the region's unfolding debt crisis. Many of the proposals under consideration would take years to put in place. That could help prevent a future crisis, but wouldn't address more immediate problems, such as the widening banking turmoil in Spain.
Adopting the Swedish model with ultra transparency takes very little time to put in place and would end the unfolding debt crisis and widening banking turmoil.

No comments: